‘Our focus is on profitable deals, not valuation’

Reliance Infrastructure, which was carved out of Reliance Energy’s construction wing, is often criticised for being a hotchpotch of businesses and for befuddling investors with its multi-directional expansions. The company recently announced plans to spin off its different businesses into fully-owned subsidiaries.
DNA  Sreejiraj Eluvangal and G Seetharaman caught up with Lalit Jalan, CEO & director of the Anil Ambani group firm, to find out what has been the progress in the company’s plans for value unlocking. Excerpts from the interview:

Utility is a low-risk, low-return business, while engineering and construction is a medium- to high-risk business. Isn’t it investor unfriendly and destructive of investor value to have both utility and contract construction business under the same company?
First, I am not here for the valuation game. So I won’t be terribly upset if you don’t value my company very high today… Even today, I know that if I break off every piece and package them well, I can get more than Rs 3,000 (against the current stock price of Rs 1,243.) But I don’t want to do that.

Do you agree that there is a valuation discount for the company because of the hotchpotch nature of its operations?
There would be investors who understand the engineering, procurement and construction (EPC) business and others who understand a utility business like power distribution, but few who want both in the same stock?
Yes. My transmission unit is valued at one-time its book value, while Power Grid is valued at three times. However, I will go to the market when I have an asset book of at least Rs 15,000 crore. I can then say ‘hey, here’s my Rs 5,000 crore  equity.’ But you will have to wait for it.
Besides, you can’t expect an ADAG (Anil Dhirubhai group) company to come to the market to raise Rs 700-800 crore. So if I am offering 10% of my company, it has to be worth at least Rs 15,000 crore.
Having said that, we are also demerging different units. EPC is the only one that remains in the parent company, according to the demerger scheme. The utilities have been converted to 100% subsidiaries — one for generation, one for transmission, one for distribution, one for trading, one for the fuel assets, road projects and metros.
So, under the new structure, the project may be constructed by Reliance Infrastructure or Gammon or HCC, but when the time comes for the project to be run (as a utility), it will be owned by the subsidiary. This gives me the monetisation options. When these babies become large enough, I can list them. So if someone only wants exposure in one of the utilities, they can invest only in that baby (subsidiary).

How long will it be before you start listing them and which one will be the first?
I can list them now and in many cases they will be the largest in their segment, but they are still babies. They have to grow enough to be called kids at least. So, I think it will take at least two years. As for the fastest-growing ones, transmission is growing well, so are roads and metro. Distribution is already big.

So why not list them?
We’ll see. There’s no hurry. As I said before, we are not focused on listing and valuation right now. We are focused on winning profitable contracts and growing. We have nearly Rs 9,000 crore in cash and headroom to raise further debt of around Rs 28,000 crore. So, altogether, we have a liquidity of Rs 37,000 crore.

What’s your current order book position? There was a report by Goldman Sachs recently about your order book being around $7 billion (Rs 34,000 crore). What has been the growth rate over the last 12 months?
We have two order books. One is for EPC contracts for other companies. This order book is around Rs 21,000 crore. The second is my in-house order book — work done for Reliance Infra projects. That is about Rs 25,000 crore. This includes the metro projects, six road projects and three transmission projects.
As for growth, the internal order book (of Rs 25,000) has doubled in the last 12 months. The other has been steady — whatever we are doing, we are adding. We need to build more capacity there. If I have a 200-room hotel, I have to turn back the 201st guest.

What is the average tenure and funding status of these orders?
The longest tenure on my book is the metro line 2, which will be completed in five years. Most projects would be in the 2-3-years range. Except metro line 2, everything else is financially tied up. Metro 2 will take another 6-8 months to tie up. In terms of future equity requirements, these projects will require about Rs 5,000 crore of equity capital over the next five years. We have cash of around Rs 9,000 crore and debt equal to about half of that, on a very ballpark basis.

What are the prospects on your order books?
Let’s take roads. If you look at the total order book size, I am No. 2 in roads. Kamal Nath, the Union minister for roads and transport, says the government will award road projects worth Rs 1 lakh crore every year. So, even if we win just 5% of that order, it is Rs 5,000 crore worth of orders a year. In metros, at least Rs 10,000 crore worth of projects will be bid for and we are the only players here. There is Bangalore, Hyderabad and Amritsar coming up. There’s also Mumbai line 3 and Delhi extensions coming up. We can easily expect 25% of that.
In power transmission, the total (investment) requirement is around Rs 40,000 crore. Out of that, at least Rs 15,000 crore will have to be done by private sector. All these contracts will be on the BOT (build, operate and transfer) basis. In the future, we don’t expect any cost-plus models. You put in your money, you make your return. It’s up to you to sink or swim.

What about power distribution?
People come to us everyday. UP, Bihar, MP are chasing us. In Delhi, we reduced transmission and distribution losses by close to 40%. There were all kinds of (power) theft in Delhi when we went in. There were people who were stealing on their own, there were groups of people who stole and there were even cases were thefts were instigated by someone from the company. So, we will go to whichever state that is progressive.

How is your Mumbai metro project doing? Has evacuating settlements turned out to be more difficult than you expected?
Metro is progressing 18 months ahead of the government’s schedule. However, resettling people and moving them out is always difficult. Technically, it’s not our responsibility. When the government awards you the project, they are supposed to give you the land and the ROW with it. But in reality, it never happens. It’s their responsibility, but we have to work with them. There are issues like traffic management. I can always write a letter and say, ‘please do the needful’. But in reality, it doesn’t work like that.

What is the status on the takeover and extension of the Mumbai sea link project?
The Worli-Haji Ali sea link is a project that was approved by the government. But it could not officially be awarded as the code of conduct (before the Maharashtra elections) came into effect. We don’t have the letter of award in our hand. When the new government comes, it will take it up.

Can you share some financial details of the project?
Unlike the first sea link, which was an EPC project, this one is a BOT project. As for the cost, we have to buy the first piece, the Bandra-Worli stretch (already built) for Rs 1,634 crore upfront. Then we have to construct the second piece, including the interconnections. The total costs, as per our estimate, will be about Rs 5,000 crore.

So, the deal’s done?
In my view, everything is done. It was a competitive bidding, we have done the talking, the negotiations… We have done one year of due diligence… whatever questions had to be asked have been asked. Are you worried about the implementation of the project? Hindustan Construction Company (which built the Bandra-Worli link) had to deal with many troubles, such as delays in passing its bills…
This is a BOT project, so there is no question of the state government passing my bills and giving me money. My money is going to come from the users — if there are users, I get my money, if not, not.